Virtual AMA with Ali Rosenthal, Founder and Managing Partner of Leadout Capital

On March 25, Transparent Collective hosted a virtual Ask Me Anything (AMA) session with Ali Rosenthal, founder and managing partner of Leadout Capital, an early-stage venture capital fund that invests in non-traditional teams in high potential markets.

Transparent Collective hosts these sessions to increase exposure and access to Silicon Valley for underrepresented founders. The mission of TC is to prepare underrepresented founders for fundraising, to connect investors to high-caliber entrepreneurs, and to build an ecosystem where underrepresented entrepreneurs flourish.

Virtual AMA with Ali Rosenthal, Founder and Managing Partner of Leadout Capital

On March 25, Transparent Collective hosted a virtual Ask Me Anything (AMA) session with Ali Rosenthal, founder and managing partner of Leadout Capital, an early-stage venture capital fund that invests in non-traditional teams in high potential markets.

Transparent Collective hosts these sessions to increase exposure and access to Silicon Valley for underrepresented founders. The mission of TC is to prepare underrepresented founders for fundraising, to connect investors to high-caliber entrepreneurs, and to build an ecosystem where underrepresented entrepreneurs flourish.

Before founding her VC fund, Ali was head of Facebook Mobile BD & Partnerships from 2006–2011 where she helped to scale the mobile user base to 350 million. She was a member of the investment teams at Greylock and General Atlantic and began a career in finance at Goldman Sachs.

Ali served as PAGE Fellow in President Barack Obama’s administration and was a pro cyclist from 2008–2010. From 2011–2019, she has served on the board of AutoNation (NYSE: AN). In 2019, GLAAD honored her with the Ric Weiland Award, which recognizes an innovator in tech and new media who is advancing equality and recognition of the LGBTQ community.

Ali’s background followed a rather non-traditional path to the tech world that is Silicon Valley. We asked her how this unique path has influenced her investment style and the type of founders she gravitates towards.

“I’m a curious person. I love learning new things, learning about new technologies, for example, new cultures, different people, and I love to learn through people. I feel very privileged and lucky to be able to invest in innovation and in founders who are proven experts in an area of truly customer segment experts,” Ali said.

Before Ali became a venture capitalist, she was a very active angel investor. During that time, she realized that there really was no such thing as a new idea. It was more about execution and some luck. This frustrated her. She liked investing but saw that there was a gap in the market and an opportunity for her to put people in business who truly deserve to be in business.

“Many of them were women or persons of color, underrepresented and early-stage entrepreneurs who were struggling to bolt together around, perhaps because they didn’t fit pattern recognition, perhaps because they didn’t have a pre-existing network who sort of trained that kind of promo-creating set of behaviors that some people are quite good at raising money sort of thing… It was potentially an opportunity for LPs and people who invest in me to put their money to work to, frankly, find the undiscovered gems,” Ali explained.

Ali continued with providing the zoom attendees with valuable information for starting out at that beginning stage of fundraising and how to move forward building your company from there. She broke it down in a few different ways:

  • Maintain confidence in your vision and what it is you want to do with your product and with your company
  • Bury the ego a little bit and be open to feedback. Evaluate and analyze whether or not actually pursuing that feedback makes sense for you and is congruent with what you want to build
  • Be purposeful about picking the people you’re going to add to your team, especially your early on
  • Try not to take it personally. Take the feedback and you’ll find the right investor for you

When asked what the most important piece of the story for founders to bring into initial meetings with investors, Ali said “The ability for a founder at the pre-seed stage, to communicate the compelling need or problem or shared pain point in a community or in a customer segment and the broader market, is some of the more interesting information you can provide. How you provide will be pretty unique to you. The more unique and the more insightful backed up by your observations and your understanding of a customer segment and a market they exist in and a market you want to tackle, the better.”

Specifically, at Leadout Capital, they look for someone who knows how to write code and can ship a fast version of a product. From there, they want to see specific user adoption and retention.

A lesser-talked-about aspect of building these businesses at the pre-seed level is the need for marketing. Is it necessary? What type of proof in marketing is needed?

Ali answered, “If they’re able to generate revenue from the sale of the product, then you can start to apply a marketing cost and start to look at customer acquisition costs and payback… if you’re selling something physical or something that people show a willingness to pay for, then you can start to do the customer acquisition costs, some marketing stuff.”

The conversation continued with Ali explaining more about what Leadout Capital looks for in founders and what their mission is with investing. They look for alignment in values, companies that put an effort into diversity and inclusion, and supporting women in entrepreneurship.

On the other hand, Ali encouraged founders to ask themselves the following questions when they are looking for the right investors:

  • Do they understand your business?
  • Do they understand you?
  • Do they understand your vision?
  • Do you trust them to articulate that when they make a call for you?

“I think it’s really building trust and respect with someone… In many ways, it is an investor’s privilege to get to partner with you. We create the most value for our LPs when we pick right, and hopefully, you’re creating the most value when you hire the right people and you build the right product and you solve the customer pain point that you’ve identified,” she said.

Overall, Ali’s background provides her with an interesting take and nontraditional mindset on all different aspects of the business. She was an amazing guest to have on our virtual AMA to discuss how founders should be approaching investors, what investors look for in the pre-seed, and advice on how both parties can proceed from the initial stages of contact.

Read the transcription below for a full recap of the conversation:

Rohini Pandhi:

All right, awesome. Well, welcome, everybody. This is a good group of folks. I see some familiar faces. Hey. All right. Well, let’s kick things off since we’re already a few minutes into it, and I’ll make sure that we have hopefully a very interactive session and you all can start asking questions directly, but let me give everybody a bit of background. We’re in a very candid Ask Me Anything, an AMA. We’re brought to you by Transparent Collective, and with one of our favorite early-stage investors, Ali Rosenthal from Leadout Capital. Thank you for being here. Welcome, Ali.

Ali Rosenthal:

Thank you for having me.

Rohini Pandhi:

Quick bio. We’re very excited. I think this will be a great conversation, so quick bio. Ali founded Leadout in 2018 as an early-stage venture capital fund that invests in non-traditional teams in high-potential markets. Her career includes operating roles in technology, finance, investing, and professional sports. She was one of Facebook’s earliest business hires in driving growth and adoption for Facebook Mobile. I think the number was like 350 million people on Facebook Mobile, huge. Most recently, she was a VP of Partnerships at Wealthfront, and also a member of the investment teams at Greylock and General Atlantic, and started her career in finance at Goldman Sachs.

Rohini Pandhi:

Lots of interesting areas to dig into, but I’ll get the AMA started with a general question or two. I just want to make sure this is super interactive since we have a very closed group of people here. Just send in your questions on a Zoom chat and I’ll just call on folks to unmute yourself to speak directly to Ali throughout the event.

Rohini Pandhi:

Anyways, to get things started, Ali, what I think is really incredible and interesting about you is your background is very nontraditional, kind of similar to your investing strategy. You were a PAGE Fellow in President Obama’s Administration. You were a pro cyclist, and then you moved into kind of like “tech scene.” What do you think having that unique background and perspectives means to your investment style and the type of founders you generally gravitate towards?

Ali Rosenthal:

It’s a great question. Thank you, and thank you for the wonderful introduction. At Leadout, we’re early-stage investors and we consider ourselves generalists. I like that probably because of the non-obvious or the attributes of the non-obvious background you just described, but for me, I’m a learner. I’m a curious person. I love learning new things, learning about new technologies, for example, new cultures, different people, and I love to learn through people. I feel very privileged and lucky to be able to invest in innovation and in founders who are proven experts in an area of truly customer segment experts.

Ali Rosenthal:

For me, as I built my career, I wanted to go around and learn. Coming out of undergrad, I’d been a history major, but I pursued a career in banking because I perceived it to be a really good training ground for learning business and industries and how businesses kind of grow and measure their success or performance. To me, I grew up in the Northeast in Connecticut and I thought, “Oh, I’ll go to the big city. I’ll go to New York City, and just being in New York I’ll meet people and see different ways of life and experience different sectors of life.” That’s kind of how I broke through my career.

Ali Rosenthal:

I wrote a blog post when I joined Wellfront, which is my last full-time operating role, where I compared… I’m a pretty bad surfer, but I sort of compared figuring out next career steps to surfing and figuring out as a surfer how you find best waves so as to improve. For me, it always starts with people because the best surfers know the best locations, know the best waves. You’ll get the best sets if you kind of look to where the best surfers are.

Ali Rosenthal:

For me, I’ve always followed people throughout my career. People brought me to banking. People brought me to technology and technology investing. People brought me to Facebook. People whose minds and whose interests I felt like I learned the most from and I often gravitated to the markets, the sectors of industry, the skills, the innovation that was most compelling in the world, frankly, at the time I was able to top into it, the second thesis markets.

Ali Rosenthal:

Then, the third piece, of course, is when you bring your surf board to the beach and you look for the best surfers who are on the best waves in the best markets, what tool are you bring to surf the wave? For me, that’s been picking companies, either as an investor or as an operator as well. That’s kind of how I think about learning and trying to participate in success, which I’ve always perceived to be a group thing.

Rohini Pandhi:

Love that. A couple of questions on like those early days of Leadout, and maybe I’ll start with before you then became a VC, you were an incredibly active angel investor. I think over 30 investments in like consumer, mobile, SaaS businesses. When did you know VC was kind of the right route for you and that was the industry you wanted to be in? Who are the people that you learned from? Or why was this surfing area the most interesting for you?

Ali Rosenthal:

Yeah. I got my training as a principal investor at a firm called General Atlantic Partners, which is headquartered on the East Coast but is a global later stage investment firm that focuses on information technology investing. I think that’s where I kind of got bit by the love-to-learn bug, love to kind of go deep into business models, business analysis, market analysis, working routines, understanding innovation, shipping product, that sort of thing.

Ali Rosenthal:

I did really like that and what I discovered, though, having worked in the operating roles at Facebook and Wellfront and a couple of other startups is that I actually really liked the earlier stages of company formation and kind of the pace and the creativity and, frankly, the stress at times that you’re under to kind of take something from nothing and kind of move the ball forward. I think the combination of working in that environment as an operator after business school, where I was at Facebook and several other companies, honed by view that early stage is where I like to spend time, but I sort of always knew I wanted to come back to investing.

Ali Rosenthal:

I started just to practice. I had the good fortune to have a little liquidity in 2010 when angel investing was kind of still nascent. A lot of people are angel investing now, but this was kind of pre even super angels. It was very much a cottage industry at an earlier stage to the cottage industry that is or was traditional venture capital, Sand Hill Road, et cetera, and that I’m actually seeking to disrupt a little bit with Leadout.

Ali Rosenthal:

That’s kind of how I got my exposure to angel investing. I liked that and I think where I got frustrated when I ultimately decided and I… I think you asked me this question later on in our prep, Rohini, but where I decided to launch the fund was because I saw this gap in the folks, the founders who actually have access to early-stage capital, including from angels, to really set up their companies or set up themselves to really execute.

Ali Rosenthal:

One thing you learn as an operator, I’m sure many people on this call can relate to this and I know you can, Rohini, is there’s no such thing as a new idea. It’s all about execution and some luck. If you can’t execute when you’re starting a company, if you can’t be focused on how you launch your product, how you measure your product, how you get that next customer because you’re out fundraising, you can go out of business. One of the things that I was finding as an angel investor is that some great founders were coming to me.

Ali Rosenthal:

Many of them were women or persons of color, underrepresented and early-stage entrepreneurs who were struggling to bolt together around, perhaps because they didn’t fit pattern recognition, perhaps because they didn’t have a pre-existing network who sort of trained that kind of promo-creating set of behaviors that some people are quite good at raising money sort of thing. They have great ideas and they have interesting traction in their business, but people would come to me and say, “Well, I’ve soft circled this amount of money, but I don’t have a lead. Everyone told me to go find a lead and when I got a lead, then we would finish my financing.”

Ali Rosenthal:

I thought, “Well, I should probably be the lead if I can.” There’s some amazing founders here who have great ideas and I don’t understand why they’re not getting a lead. Perhaps it’s bias, perhaps it’s unconscious bias, but that seems like an opportunity, and so I combined that sort of understanding of-

Rohini Pandhi:

Love it.

Ali Rosenthal:

… myself that I really like the early stage, that I really like the investing, and that there was this gap and this opportunity to put people in business who absolutely deserve to be put in business. It was potentially an opportunity for LPs and people who invest in me to put their money to work to, frankly, find the undiscovered gems.

Rohini Pandhi:

Right. That’s great, and fits the Transparent Collective thesis very well, too.

Ali Rosenthal:

That’s why I sought you out . That’s why I funded some of your companies.

Rohini Pandhi:

That’s right, that’s right, and now, we actually have one of our founders who was in our last batch who just sent in a question, so Elkanah, I don’t know if you can… can you unmute? Do you want to ask a question directly>

Elkanah Carnell Reed:

Of course, I would love to. Hey, Ali, when I saw Vern speak at you, I was like, “Yo, I got to be here.”

Ali Rosenthal:

I love Vern. Oh, Vern.

Elkanah Carnell Reed:

Yeah, so what I built was Workopti. Workopti drives the interoperability of workflows across marketing operations. When you were talking about the relationship aspect of how you developed as an investor really resonated with me as an entrepreneur. When you talked about like the mediums through which we ride the wave for entrepreneurs, it’s the platforms that we build. My question to you is that, how… I’m fundraising right now.

Elkanah Carnell Reed:

I’ve got a pre-seed round going, 21% reserved, and I find myself because I did not have a mentor network, I did an investor walkabout because I found myself in a position where a lot of investors wanted to meet me and I wanted to build a relationship with them. How do you start to discern who is going to get high conviction as they start adding you to like their private newsletters and all of these things that I’m getting exposed to now? I don’t just waste my time because I don’t want to just become a professional fundraiser.

Ali Rosenthal:

Yeah, so you’re in that fun… Well, I like to joke that there is no fun in fundraising, but that’s not true. You kind of have to just work your own mindset around it. It’s an opportunity to meet people and it’s an opportunity to test your negotiation skills where you’re raising money because I have a ton of empathy for founders of product companies and corporations. You guys are being formed as corporations and then go, because I founded a company, it’s just mine’s a management company, it’s a fund instead of a product company, and I’m raising money actually now. I’m raising my second vehicle.

Ali Rosenthal:

There is advantage and privilege, I think if you see it that way, in having the market sort of share your story a little bit, but not kind of take you off-course too much. It’s knowing yourself, knowing what you want to do and staying convicted in your own vision. If people are sort of pushing back and saying, “Well, we need to see this,” it’s listening to that and sort of understanding whether or not that makes sense for how you allocate your time so as to come back with whatever they said they needed to see assuming that they would say, “Great, you did that, let’s continue the conversation or let’s partner.”

Ali Rosenthal:

I think you have to maintain a confidence in your own vision and what it is you want to do with your product and with your company, but also kind of bury the ego a little bit and be open to feedback. You can listen, you can take it in, and you can evaluate and analyze it later as to whether or not actually pursuing that feedback makes sense for you and is congruent with what you want to build and how you want to go about it. You may have to kiss a lot of frogs, but I think if you continue to kind of reflect on what it is you’re trying to do and you are clear to communication with yourself and then with the people you want to work with about that, you’ll find the right investors.

Ali Rosenthal:

There’s a lot of money out there. I think there’s a lot of unlock happening right now. It feels frothy, but it also feels like one of these secular shifts is happening. Maybe COVID ushered this in, but new businesses are being formed, new products are being built. You have a whole new set of buyers, a whole new set of budgets, and so being, I think, purposeful about picking the people you’re going to add to your team, especially your early on because it’s a really important relationship with an investor and a founder, is probably the thing to stay laser-focused on. Know that if you do that, you’ll find the right investors.

Elkanah Carnell Reed:

That really answered my question. I was just like taking little notes because I’m going to like tweet it.

Ali Rosenthal:

Oh yeah

Elkanah Carnell Reed:

That’s good.

Ali Rosenthal:

… oh no. Thank you for the question. It was a great one. It’s like you start something, you put yourself out there and it’s an extension of you, and when people ghost you or they pass or they tell you what’s wrong, it’s like someone told you your kid was ugly. It’s hard not to be like, “What?” Try not to take it personally. Take the feedback and you’ll find the right investor for you. It happens to all of us.

Elkanah Carnell Reed:

No, thank you.

Ali Rosenthal:

Good.

Rohini Pandhi:

I think that was a great question. I’d love to extend it a little bit. A lot of times founders almost want to know, “What shouldn’t I put in the deck? What should I put?”, because they think if there’s a bit more concrete… I do think that there is some input there of like the right narrative, the right story that you want to tell before a meeting or even during a conversation with an investor.

Rohini Pandhi:

I’m curious if there’s any recommendations on dos and don’ts, how important our financial projections in pre-seed companies where most of that is probably made up anyway, or, how important are product demos? Things like that. Can you give me some general advice on what to include as part of their story?

Ali Rosenthal:

Yeah. I think if we sort of speak to what we look for and then-

Rohini Pandhi:

Perfect

Ali Rosenthal:

… like what I see in a market as well because just because that’s what I look for doesn’t mean that someone else wouldn’t love to see that or wouldn’t say to you, “Well, why didn’t you put in a five-year model projecting how you’re going to get to $50 million in revenue?” I think if the pre-seed… I’ll speak to pre-seed and then I’ll speak to seed form our perspective, and then I’ll talk to you about kind of what I think the market to make sure it’s different from what I look for or what Leadout looks for.

Ali Rosenthal:

For us at the pre-seed stage, we understand that you don’t have a lot of traction. The great series A funds who get all of the best deal flow can sit back if you’re Benchmark or Sequoia or whoever and wait to get the introduction into the company that is clearly starting to hit product-market fit. Then, it’s a battle on price or who from the fancy list of names at these firms are going to join your board. That’s awesome and you leave it.

Ali Rosenthal:

Pre-seed and seed, we at least at Leadout expect that you will have not hit product-market fit, but we kind of want you to tell us what you are seeing that is the most interesting to you about feedback on your product. The ability for a founder at the pre-seed stage, I think, to communicate the compelling need or problem or shared pain point in a community or in a customer segment and the broader market is some of the more interesting information, I think, you can provide. How you provide, I think, will be pretty unique to you, and the more unique and the more insightful backed up by your observations and your understanding of a customer segment and a market they exist in and a market you want to tackle, the better.

Ali Rosenthal:

At the pre-seed stage, if it’s a bunch of like, “Hey, this market is massive and if we just get to 2%, we’re going to be worth this.” I will go do that research anyway. It’s good for you to have it in there, but I’m much more interested in like, “What about this customer need?” Either as an end consumer or a business or an organization within a business organization that you want to provide a solution for with… In our case, we look for software and new solutions, but there are more straight down the middle consumer investors, hardware investors, et cetera, pharma investors.

Ali Rosenthal:

I think the ability to communicate a compelling need is really important and that kind of be the hook. Then, it’s like, “Let me tell you why you should be paying attention to this evidence,” whether it’s like, “This indicates a fix or a delightful moment,” or, “This conversion rate is higher because no one else does this.” There’s aspects to, “Okay, who else is in the market that you’re competing for share in?” Et cetera, et cetera, but I really think at the pre-seed level, how do you communicate that you have an insightful or unique insight about a problem that exists and how you go about solving it?

Ali Rosenthal:

For our structure virtually, that specifically, because we’re self-driven investors, we also like to see like a built MVP. It can be pretty rickety, but for us, we tend not to fund a business plan and a suggestion end-year model that, “Hey, we’re raising money to go find a CTO or a VP of engineering.” There are plenty of pre-seed funds that do that. Leadout specifically just wants to see because I come from software, my business partner’s an electrical engineer, we look for someone who knows how to write code and can ship a first version of a product. I think that helps you tell your story, too, in terms of evidence in the pre-seed space.

Ali Rosenthal:

Seed, we want to see an operating data. You want to see enthusiastic user adoption and retention. That can be reflected if you’re a B2B company on a willingness to pay or even a willingness to give you the logo and tests, but some evidence that the product is being used or paid for, and then same on the consumer side, cohort analysis, everything from your funnel to how you’re actually attracting users. Then, the consumer side especially, how much organic growth are you getting? A lot of investors kind of cringe at the notion that a bunch of the round will go to Facebook’s bottom line or Twitter’s bottom line because you’re paying to acquire this segment that say is your perfect segment, but that ends up churning quite a bit.

Ali Rosenthal:

If you’re in the seed stage and you’re raising like in your consumer company, I’m definitely prepared to go through cohort analysis and churn and organic growth and kind of how you’re finding the channels to, virally or otherwise, get people to adopt your product. Well, and I think that is true-

Rohini Pandhi:

That is super helpful

Ali Rosenthal:

… across the board in the space. True for us if you’re in the market.

Rohini Pandhi:

Yeah, perfect. Actually, I think, Cali, you had a question that might be double-clicking on this. I don’t what Ali just walked through answered it, but do you want to introduce yourself and… Oh, it looks like you’re waving, but… It was answered?

Cali Carlin Sorenson:

Yeah. Honestly, yeah, you just actually answered my question perfectly. I was asking about timing of action revenue, so that was perfect. I do have a question more about what has to be proven in marketing because, obviously, I’m the co-founder of a company called Commemo which uses software to make group tribute books. It kind of takes the pain point of having to collect and gather those comments. We collect them. You share the link and then we collect them and we autoformat them into the book because we found if you try and make a 60th birthday for your mom, it can take 40, 50 hours. We take that down to like two hours.

Cali Carlin Sorenson:

Anyway, but we are finding some great traction virality, but obviously our next phase we would need marketing. What type of proof do you need in marketing to be able to raise some seed money for marketing? Or is that always a no-no to need money for marketing?

Ali Rosenthal:

Oh, I think there are certainly business models that lend themselves to marketing and they tend to be business models… They tend to be… If they’re able to generate revenue of the sale of the product, then you can start to apply a marketing cost and start to look at customer acquisition costs and payback. One thing I hesitate to encourage founders at the very early stage to include in their debts is like a guess at like lifetime value. I think it’s fair for an investor to understand for you to show that you understand how much it costs each to acquire a user, but if you’re able to pay that back because your margin in your first margin kind of beats the cost of acquisition, you’re in a good spot. Then, there are different kinds of businesses.

Ali Rosenthal:

It’s hard for me to say, “I’m like a physical product business,” or even kind of like a link to a virtual product, but if people are paying and you have margin, you can start to play with, what’s the best channel to go acquire more customers? If your product is free but you have to pay to acquire for usage, that can feel a little nerve-racking. We’ve famously sort of… well, famous in my mind. I don’t know if this is kind of more about Facebook, but for a long time Facebook was known as to say that we never spent more than $150 on marketing for the first four years of the company. Even then, there was resistance to building marketing in because the network effects and the virality of the product just… we didn’t need to spend on growth.

Ali Rosenthal:

That’s changed at Facebook now. I’m sure if you opened up their public financial review, you would see marketing spend up the wazoo, but at the early stage, the point was, “This is so viral, this is so sticky, this is so engaging, we don’t need to pay for it.” If you’re asking a customer to pay and they are paying, then you can go find more customers who look like your payers who are willing to pay, so I think that’s totally appropriate if you’re selling a product, if you’re selling something physical or something that people show a willingness to pay for, then you can start to do the customer acquisition costs, some marketing stuff.

Ali Rosenthal:

Then, I think if you’re already stage two, if you’re a founder who’s not necessarily eyeball-deep in marketing experience from prior jobs or education or whatever, it’s okay to do founder-led marketing. Founder-led sales is a thing, too, where you’re the person articulating vision. You’re the person recruiting talent. You’re the person trying to build your customer base. You don’t have to hire for that yet, further on the budget for it, and frankly, it should be done by you, but if there starts to be an equation or a machine where you know there’s a segment of people who want that product and they are willing to pay, then as long as it doesn’t cost you more to get them, hey, that’s something that you should be playing with, for sure.

Cali Carlin Sorenson:

Thank you.

Rohini Pandhi:

Great. Great question, and one thing we actually skipped over was kind of before you even get to that pitch or the story or what the funds are going to be used for is introductions. Carrie actually asked a question specifically on the first part of the process, so Carrie, would you like to ask your question?

Carrie Love:

Yeah, thank you so much. Carrie Love, I’m the CEO/co-founder of Must Deliver. We intelligently match owner-operators to shipping clients and we’re really focused on small-to-medium-sized manufacturers and owner-operators and small carriers. We’re already operating. We’re post-revenue. We’re in the Midwest. We’re launching the West Coast. I’m closing an angel round, which I’m so excited about. It’s insane. It’s so much work when you’re trying to also operate your business, but it is that you’re doing… Your founder that’s leading the marketing, which is my background, leading the sales, which is my background, operational.

Carrie Love:

I now have to close, pivot, and focus on opening our first price round, which is a seed round. I’m in Portland, Oregon, and it’s COVID. How do you network? I have to say thank you for doing this because it’s a great opportunity. My COO, John Mecklenburg saw it and was like, “Sign up for this. You have to do it.” Thank you for doing this event-

Ali Rosenthal:

Sure, you’re welcome.

Carrie Love:

… because it gave me an opportunity to talk with people. Our real core value is we’re a hundred percent transparent, so everybody sees a transaction, everybody sees the same paperwork. We may be a little in front of the industry on that in trucking for the U.S., but we won’t compromise, so it’s like, “How do I do it? Where do we go?”

Ali Rosenthal:

Yeah. Well, I mean, you’re right. Events like this, thank you to Rohini, and the Transparent Collective team are so important, especially when we’ve all been sheltering in place. I was actually talking to a founder of a later stage business that it’s kind of been energy storage before this. We were just… I think it’s really important to build relationships and affinity and networks despite kind of the physical forced separation that we’re all in right now. There are a bunch of tools that, this being one of them, Zoom being one of them, but you might have to make a little bit of an extra effort because information flows differently and not as maybe organically as when you’re… You do whatever you do to bond with people, whether it’s a cocktail party or a event or a music concert or a round of golf or something.

Ali Rosenthal:

Reaching out to one another and networking and especially peers, peer networks are really, really important. You’ll have your relationship with your investors and your advisors, the people you don’t want to disappoint, the people you want to show up to the meeting and make sure you’re telling your story and you’re showing up. It can be harder and it can be very lonely to kind of deal with a bunch of, “Oh my gosh, what do I do given that this happened?” Being able to turn to other founders who have experienced or are currently experiencing the ups and downs of founding something is crucially important.

Ali Rosenthal:

We’ve had to sort of adjust in the sort of post-COVID environment to how we do that, but building community, being able to ask for help, being helpful when asked can really sustain you in these arguably pretty dark days at times. You have opportunity costs. All of you guys are super talented and you can get paid a bunch by bigger established companies and apply your skills and your energy to their vision, and you’re all taking a huge risk. I would say figuring out who your network is in terms of peers is really, really important and that can lead to introductions. “Hey, I just closed my round, but this fund was really interested in what I’m doing and there’s an aspect of what you’re doing that is interesting. Should I kind of make an introduction?”

Ali Rosenthal:

That feels good and it’s… I don’t know, it’s just the way of building, I think, the type of connective tissue between people who have experienced like similar sort of challenges that I think will just be so good for your mental health and your fundraisers and for each other. I really, really encourage that.

Carrie Love:

Thank you.

Rohini Pandhi:

Awesome, and I think just to add onto that, too, Carrie, you can also you your angel investors since you have all of them kind of helping out. Use them to try to network as well because I will say the angels usually know who the investors are to go to and who they kind of keep up with and have relationships with. I usually always say that a founder should talk to Lido. That’s like the first person that I always try to move people towards

Rohini Pandhi:

… and so if you use the angel investors to get the real deets.

Ali Rosenthal:

No, that’s great-Your success is their success, right? They took a bet on you.

Carrie Love:

Yeah.

Ali Rosenthal:

They want to help and presumably you’re an angel because you want to help. You expect that you do a bunch of work in the beginning, and if it works, then 10 years from now it’s like, “Oh my gosh, I was an investor in this,” but that’s kind of the social contract that most angels go into investing with eyes wide open, so…

Rohini Pandhi:

Yeah, exactly, exactly. Oh, okay. Elkanah, do you have another question? I haven’t even read it yet, so I’m just going to let you run with this.

Elkanah Carnell Reed:

Oh, and that was really kind. I have two kids under the age of three, and they are coming in, but my question is so I have a strong team as an enterprise success startup pre-seed. Pre-seed on the institutional level is a rather new entity, and so I got a chance to spend time with like series A investors. Series A investors are telling me like, “Elkanah, as you go through this process, this has already venture scale.” People tell me that, but they also say, “If you get to meet… My job, personally,” and this how you determine a good investor, “Is to go get you to like Iconix or Andresen because we have X-billion-dollar AUM and they can take you all of the way through to fulfill the full product vision.”

Elkanah Carnell Reed:

With the lack of data, sometimes to attack this analytically just the way people look at underrepresented founders. With the lack of data in pre-seed, how do you know when someone actually has the relationships to do the things like to build a very large company when there’s not really a lot of data that shows that that’s even possible, right? Seed, yes, series A, but not so much of a pre-seed. Just looking at it critically.

Ali Rosenthal:

Just running through your question, are you saying how do you as a founder that you’re-

Elkanah Carnell Reed:

Yeah. How do I as a founder start to understand that? Just because I have been told two schools of thought. I have people who have told me who have raised institutional pre-seed rounds saying, “Don’t raise pre-seed from institutions. Go raise from angels-

Ali Rosenthal:

Oh.

Elkanah Carnell Reed:

… “because it’s a better use of time than capital-

Ali Rosenthal:

Oh.

Elkanah Carnell Reed:

… “versus like actually going down the institution around four pre-seed.” That’s why and I think some of that is because typically like the high-signal investors are really at seed. Pre-seed is that emerging class in terms of institution. THat’s what I’m trying to say. I’m just trying to understand so I don’t spend all of my time fundraising. How do you start to discern all of this so that you can get the right partners at the right stage and move forward?

Ali Rosenthal:

Yeah. Well, I mean, pre-seed as a category, kind of getting back to what I said I look for, it sort of depends on where you are in your key development and your product development and sort of your push into the market that ultimately kind of… There are two ways to look at it. One is, “This is my first institutional raise. I haven’t had to take money before, but I’m already doing a million dollars in revenue run right. You’re probably not a pre-seed company. Maybe you are, but maybe it’s a seed and my guess is you’re doing that because you have more than just one person working on things, so you’ve actually hired people.

Ali Rosenthal:

If you’ve been able to bootstrap, if you’ve been able to raise a round of like friends and family so as to get yourself there, kudos. If you don’t have those resources but you’ve started to build something that clearly the market wants and you need to you pay people, you need to pay yourself, you need to pay to post stuff on AWS or whatever, then go find the investors appropriate for the size around you are and tell them why you’re raising as much as you are.

Ali Rosenthal:

The category pre-seed these days tends to be anywhere from on the low end $250,000 up to a million and a half is probably still considered a pre-seed, and there are investors who focus on pre-seed only or mostly and will write checks that are between 100K up to sometimes 500K and help. They are institutional investors. They have limited partners themselves and they’ve thought about the strategy of spending time in the space to meet founders when they’re raising their first institutional round. They might be willing to move with you a little faster because they have already thought about the risk of the stage and the size of the company and the traction, but they want to get in early and want to get in first and they’re willing to take that risk. They write slightly less large checks.

Ali Rosenthal:

When you have big like… You mentioned Iconix or Andresen, these guys have massive amounts of funds that they have to put to work, and when you think about what motivates them so that they can keep paying their salaries and keep making their carry, they got to return tremendous value on billion-dollar funds. Their time best spent is probably on companies that are larger that can take more money, that can take that $200 million check that can turn into 20 or $2 billion of value. You don’t want $20 million right now. You wouldn’t know what to do with it. You’d be basically handing over your company, so they’re the wrong ones for you.

Ali Rosenthal:

I think some firms that do sort of multi-stage investing and say that they come down the stack, if you will, they’re doing it earlier and earlier, it’s going to be careful with those guys, too, because, yeah, they might write a check, but are they really going to help? It may just be like a bet on red. It’s like, “Oh, this guy’s interesting and sure, that’s interesting. We’ll just keep track of it.” Then, when you call and you say, “Hey, I need those customer introductions,” they’re going to be like, “Yeah, yeah, yeah, yeah, yeah, we’ll get back to you. We’ll get back to you.”

Ali Rosenthal:

Be wary of the funds that have decided, and then know they’re smart, smart people that run these things that know that the early stage is probably the best kind of stage to get in, especially if you’re right, who have funds to kind of throw around but who don’t have the time. That’s the one thing that is not fungible for all of us. We cannot clone ourselves and make another hour in the day, so be wary of the funds that say, “Oh, yeah, yeah, yeah, well, here’s our big name.” Easy for us to kind of check and actually don’t help. Take their money if you’ve got other people around the table who will help you, but I do see a part of… Leadout’s thesis is direct, guys.

Ali Rosenthal:

This is a very, very, important time in your journey as an entrepreneur and in building your company, and you do want, I think, investors who sit around the table and who have an understanding and empathy, who have large operator networks, who are willing to roll up their sleeves and be an accountability partner with you as opposed to like bigger funds that just are trying to build an index and may not help you.

Ali Rosenthal:

If you can build a syndicate where you have someone who’s really going to help like Rohini, and then you have like an Andresen, sure. If Rohini and them end up doing a lot of the work, but you can also be thoughtful about how you build your syndicate and who you want to be helping every day is. Yeah, sure, big AUM businesses, they might have the cash, but they may not be that helpful to you.

Elkanah Carnell Reed:

That was so good. That was the truth and thank you. You spoke the truth.

Ali Rosenthal:

I’ll just say

Elkanah Carnell Reed:

The truth.

Ali Rosenthal:

Now, I have to remember what I said

Elkanah Carnell Reed:

The truth. I’m tweeting it.

Rohini Pandhi:

Sure, all done, we’ll tweet about it later. Perfect perfect. We have about 15 minutes left, and now the questions are really starting to come in, so I’m going to go from the first folks that started asking and we have another TC alum are you on? Can you unmute yourself and ask your question?

Speaker 6:

Yes. Hello. Thank you again for doing this. I had a question just because I think… I started the company… I started the GetLabs back in 2014, and then I ended up taking a break and now I’m kind of coming back and relaunching it with some of the same people and some new people. With everything that’s happened this year and kind of seeing on like a sociopolitical/economic level, everything is dramatically different and I’m just wondering how, one, if it’s personally affected your kind of thesis around investment. Then, two, if you’re seeing any kind of influence on the field as a whole, the sector as a whole, yeah .

Ali Rosenthal:

The sector meaning like venture? Or technology?

Speaker 6:

Venture.

Ali Rosenthal:

Or… Okay.

Speaker 6:

Yeah.

Ali Rosenthal:

I’ll answer the first question first, which is, has it affected our thesis at all? No. When I started the fund in 2018, and there are a lot of funds that kind of share my thesis now and that at times has been a little frustrating, but also like very gratifying for the most part. I always said that if I put myself out of a job with this thesis because everyone thought this was like that we’re right, that like… It’s not enough to be right in investing.

Ali Rosenthal:

In order to create alpha, which is what we’re supposed to do as early-stage alternative investors, you need to be non-consensus and right, and so if it’s not a consensus to bet on the fact that talent is evenly distributed in this world but that opportunity has been constrained to different types of people, let’s be honest, to different sectors of the world to different degrees, academic degrees. That was a bet I was willing to take all day, especially having been at Facebook from early on and just seeing the secular shift, the sort of transformation that happened with mobile and mobile computing. Now, we have low-code and no-code and there are just more and more tools that are less expensive that next generations of humans are more versant in.

Ali Rosenthal:

Why wouldn’t you believe that people who come from a community, come from a lived experience, come from a different training would have the kind of core insights around a problem that exists that they wish to solve and then have the tools and the skills and the capital to pursue solutions to that problem? I’m even more convinced, given everything that has happened and the evidence of how business are being set up partly as a result of this black swan event that we’ve all have been living through for the past over a year, that my thesis is correct. It seems like a lot of other managers seem to think that that is true, too, which is great, and if I put myself out of a job with this thesis, that would be a good thing.

Ali Rosenthal:

Unfortunately, we have a lot of work to do. I have a $27.5 million fund. Andresen is, what, however many billions of dollars? Most venture capital and private equity is directed by white men still and it gets directed to white men. I will say something about my thesis that is I like to think as very inclusive of white men, and one of the first companies that I invested in was a group of men, two men who are white and one guy, his family was originally from India, South Asia. They were kind of inherently not diverse when I first invested in them, but I talked about what I care about as an investor and in what Leadout stands for, which is grounded in diversity, equity, and inclusion.

Ali Rosenthal:

Then, I didn’t want to be the arbiter of what constitutes diversity because there’s a cognitive diversity, there’s intellectual diversity, and diversity is a function of numbers and that we all do better by like embracing diversity, even though it can seem a lot more friction, it can feel harder at the beginning. There are reams of data that show that diversity outperforms but that your opportunity to build a diverse organization on every level happens at the beginning of a company’s limitation.

Ali Rosenthal:

You can be a not inherently diverse team and still get money from Leadout Capital so long as you are committed to building diversity into your organization, and this company that I would say we were early investors in has done that. Their team today is roughly 50–50 minimum across organizations. We already had a question about how we think about diversity, sort of explaining to you. Could be doing better on ethnic diversity, but they are being purposeful about who they source from. There are a lot of emerging groups and sectors of software-driven talent that are popping up and they are holding themselves to hire from those areas and I love that. We need allies.

Ali Rosenthal:

The point is not to flip the world on its head where everyone who was in charge now feels oppressed out of some sort of like vengeful… I mean, that’s not going to be good for everyone, so the idea is to, at least for us, really vet for alignment values-wise when we build relationships with founders and tell them what we care about and tell them that they should hold us to account to help them with what we care about. That’s kind of our approach to things, so I haven’t changed at all on that. In fact, I’m doing my best to enhance the resources that I provide to the portfolio to kind of put my money where my mouth is and really help all of my teams with that.

Ali Rosenthal:

Unfortunately, to answer your second question, is driven a little bit by some rough data, especially around women in the workforce, women starting businesses, women receiving venture capital. These numbers are all down over the past couple of quarters. I think at a broader sort of national economic level, almost a million women dropped out of the workforce in the third quarter of 2020. Many of them… I think the majority of them were persons of color, and so there’s a lot that needs to be addressed, I think, hopefully by between the group of you here and how you’re going about thinking about not only hiring people into your businesses, but building businesses that hopefully empower people to work differently.

Ali Rosenthal:

Unfortunately, a lot of caregiving falls to women and we’re seeing that in the numbers. It’s very hard to start a business when you also have to get your kid to school or get your kid masked to school or do virtual learning with your kid. That falls on men, too, but the numbers evidence that it falls more on women if you look at the number of women in entrepreneurship. That has changed. That is a concern and that’s why I’m raising another fund to do my part.

Speaker 6:

Thank you so much.

Rohini Pandhi:

Love it. That’s great. Thanks for the question.

Ali Rosenthal:

Yeah-

Rohini Pandhi:

All right. I’m going to… You’re getting a lot of applause, by the way, on this on the chat, but-

Ali Rosenthal:

Thanks.

Rohini Pandhi:

… I’m going to keep going because I would love to hit the last three questions in-

Ali Rosenthal:

Sure.

Rohini Pandhi:

… maybe the 10 minutes we have. Diego, do you want to introduce yourself and ask a question?

Diego:

Sure, and thank you guys for doing this and thank you, Ali, for taking the time. I’m Diego. I’m originally from Venezuela. I’ve been in the States for the past 10 years. I’m a first-year MBA at Wharton now and working on a platform for influencers to sell food products. I’ve been following you guys since you started. I had kind of a high-level question on Leadout. Curious to see how your process of finding end supporters, what you call them non-obvious founders, has changed over evolved since you started. That’s on a high level.

Diego:

Then, the second question is, did I understand you correctly when you said that… This I say for myself. I don’t have a technical background and the platform I’m working on will require technical work. I’ve been getting support from people here at Penn and elsewhere, but basically I will seek out a CTO at some point. In your investment criteria, do you essentially pass on people who don’t have technical backgrounds? Or I didn’t understand that correctly.

Ali Rosenthal:

No, it’s a preference just to have someone on the team, and so that person could even be like… I would want to do a couple of vetted firms that you could outsource to, for example. There is sources of talent, in fact, many of which are coming from Latin America, Colombia in particular, Mexico, that if you need an iOS path developed. There’s a critical top tel that a lot of my companies use. It’s more that I want to see a working product. There’s a difference between, “Hey, I’m raising money to hire someone.”

Ali Rosenthal:

That’s a little more rickety on a number of levels, especially for you as the founder because one of the things that when you think about team building that’s so important is that you find being a solo founder is fine. It is particularly lonely. I can speak from experience. I did it for a while before bringing on my partner, Steve, at the top of the year. I have backed solo founders, but you want to know that a founder has got their support system and can do and not only like from emotional, but also can help you build.

Ali Rosenthal:

If you’re building like a product that is delivered with zeroes and ones with software, I like to see someone in place that can do that because as you ideate and as you kind of think about the product and sort of say, “This is my observation of the customer, this is how I’m going to implement it, I’ve chosen to implement the software,” that’s a core component of how you build the business, how you go to market, how you make decisions, how you hire. Having someone on your team when you’re pitching me that is doing that with you, they can be outsourced, or you developed it, you’d have hired that first person that is so core to delivering product. It’s something that I certainly look for.

Ali Rosenthal:

I have a solo founder who is a product person who doesn’t write code, but has worked with engineers, has a big network, and has known how to hire and work with engineers. When we factor, it’s more that when you see the deck that’s like, “We’re raising the $600,000 to hire someone to build the product,” that like I tend to shy away from as specific to Leadout. That’s been something I’ve learned is it can be tough for you as the founder, and certainly tough for me as the investor, so that’s kind of that criteria.

Ali Rosenthal:

Your other question, oh, was how I’m finding non-obvious founders. Well, Transparent Collective, that’s one way. That’s just something I constantly, constantly do is, where are… I love stories. We love stories. I mean, Steve Jobs was so clear about this when he was building Apple and building products for Apple. He was so clairvoyant about kind of how we as human beings identify ourselves to ourselves, to the world. It’s through stories, so I love to hear people’s stories. I’m like a sucker for that.

Ali Rosenthal:

I will go read an article. I will talk to Rohini about some company she saw. I’ll hear from one of my LPs. I’ve built a big base of limited partners who themselves are founders and executives and leaders and we really try to unlock that for you if you’re a founder in our portfolio. We’ve got some amazing people who really are philosophically aligned with the thesis. I just love to… We just wanted a company in Tampa, Florida, that’s doing Blockchain infrastructure and this woman told an amazing story. She sent me an email and great ad. You know, I thought she’d found some amazing founders who have read what I’ve written and resonate with what we stand for or want some access to some of my operating experience.

Ali Rosenthal:

Send me a great email and then we talk. That is my job is to find you guys as well, and I try to find you guys by doing things like this and by writing and by hearing your feedback. Tell me where I should be looking. Penn is amazing. The Latin founders, I have a number of LatinX founders in my portfolio, one came from Puerto Rico, a team from Mexico, and actually two Spaniards were co-located with their CEO who’s in New York and Texas. You know, it’s through founders, it’s through operators like Rohini, and frankly, you guys tell me that’s my job is to go find you guys, and any feedback for how I can do that, I’m all ears.

Diego:

Thank you.

Ali Rosenthal:

Yeah. Thanks for being here. Thanks for the question.

Rohini Pandhi:

Perfect. All right, maybe just to close out, I want to make sure that we respect everyone’s time, and I’m sure we can continue the conversation online or on Twitter or something like that if folks have more questions. Faith, do you want to ask your question to kind of close things out today?

Faith:

Yeah. I’ll keep it brief. Thanks for doing this-

Ali Rosenthal:

Hello.

Faith:

… Rohini and Ali. My name is safe in building the personalization layer of the E-commerce infrastructure, and one of the things that I’m curious about is I know you all are focused on leading. That was in the story that you were telling from the beginning. I think there’s a misconception about like what a lead actually is, whether or not a lead is writing the biggest check, whether or not a lead is the one leading due diligence. I wanted to know if you could just give us your perspective on that since that’s where you’ve chosen to focus, and hopefully we can wrap it up there.

Ali Rosenthal:

That’s awesome. I love that question. It’s super relevant because I was literally talking to a founder yesterday about this, like the semantics of what a lead is and, do you need to be writing the biggest check to be the lead? Et cetera, et cetera. I don’t know that I have the right answer, I can just reflect to you that there is some confusion about this and it exists amongst investors I would say as well. I think what I like to do as an investor and what I’ve heard my portfolio company founders say is it is hopeful to have some… I do think like if your round gets led, you can get done faster. If someone’s pricing your round, they’re setting price and there’s real discipline and experience and market analysis brought to bear there and there’s value in that.

Ali Rosenthal:

If it’s a safe round, biggest check might warrant that I say, “Hey, you know, I’m taking the biggest risk. This is early, this is risky. I’m taking the biggest risk with this check, and so as a result, I want these side letter terms.” Oftentimes with a lead, you’ll get side letter terms. Ours simply around if we’re taking the biggest risk, we want to be treated in a most-favored way, or we want the ability to follow on our pro rata. Really, I think your lead investor should be the person or the team that you want to pick up the phone and call with like, “Wow, this is a problem,” or, “I need help in this, or, “In your experience, what happened here?”

Ali Rosenthal:

Kind of the way that gets pulled together and to kind of do business is probably around round dynamics. Do they help you build your syndicate? Do they have the expertise and the network that can really unlock a lot of value for you? Have you set the expectation that that’s why you’re telling them that you can lead? I’ll take your money versus someone else’s and et cetera. It’s a little bit like a… There’s some semantics in there, some gamemanship, but I think if you think about who you want as a lead, it has more to do with who you want to be partnered with, who you want to be working with.

Ali Rosenthal:

When you’re going to raise your next round, do they understand your business? Do they understand you? Do they understand your vision? Do you trust them to articulate that when they kind of make a call and say, “Hey, you should look at this company so-and-so who does series A rounds, et cetera?” I think it’s really building trust and respect with someone and because you are giving them… In many ways, it is an investor’s privilege to get to partner with you. We create the most value for our LPs when we pick right, and hopefully you’re creating the most value when you hire the right people and you build the right product and you solve the customer pain point that you’ve identified.

Ali Rosenthal:

You want a group of people from early on who understand that and will do everything they can do to help you, but you’re the one creating value. When you think about the lead vetting investors for how they’re going to help, do you like them? Do you trust them? You’re taking a huge risk, so that’s how I think about lead is like, “Who do you want on your cap table?” There’s a lot of sausage making that we all do and it’s like, who are you willing to say, “Hey, if this is all to this sausage company, then like,” so…

Faith:

Awesome. Thank you.

Ali Rosenthal:

Yeah. You’re welcome.

Rohini Pandhi:

That was great. I love that, and I think just that relationship piece was reiterated a few times in a few different questions, soI love this. Thank you all for joining. This was so fantastic. Thank you, thank you, thank you, Ali, for helping us and talking to everybody in a very close-knit Transparent group where you can share information and just kind of give everyone the real real. I really appreciate… your time here and I think everyone came away with a… Thank you. I think folks that don’t know, you can find Leadout at leadoutcapital.com, and I think it’s @leadout on Twitter.

Ali Rosenthal:

Yeah.

Rohini Pandhi:

All right, perfect. Perfect, and for anyone that doesn’t know about Transparent Collective, we’re at transparentcollective.com and @TCfounders. Thank you again, Ali, for your time and your advice, and thank you all for joining us today.

Ali Rosenthal:

Thanks all of you. Rohini, thank you so much, Transparent Collective and thank you all for your entrepreneurship. Without you, we wouldn’t have a job, so thank you for my job!

Rohini Pandhi:

Thank you

Before founding her VC fund, Ali was head of Facebook Mobile BD & Partnerships from 2006–2011 where she helped to scale the mobile user base to 350 million. She was a member of the investment teams at Greylock and General Atlantic and began a career in finance at Goldman Sachs.

Ali served as PAGE Fellow in President Barack Obama’s administration and was a pro cyclist from 2008–2010. From 2011–2019, she has served on the board of AutoNation (NYSE: AN). In 2019, GLAAD honored her with the Ric Weiland Award, which recognizes an innovator in tech and new media who is advancing equality and recognition of the LGBTQ community.

Ali’s background followed a rather non-traditional path to the tech world that is Silicon Valley. We asked her how this unique path has influenced her investment style and the type of founders she gravitates towards.

“I’m a curious person. I love learning new things, learning about new technologies, for example, new cultures, different people, and I love to learn through people. I feel very privileged and lucky to be able to invest in innovation and in founders who are proven experts in an area of truly customer segment experts,” Ali said.

Before Ali became a venture capitalist, she was a very active angel investor. During that time, she realized that there really was no such thing as a new idea. It was more about execution and some luck. This frustrated her. She liked investing but saw that there was a gap in the market and an opportunity for her to put people in business who truly deserve to be in business.

“Many of them were women or persons of color, underrepresented and early-stage entrepreneurs who were struggling to bolt together around, perhaps because they didn’t fit pattern recognition, perhaps because they didn’t have a pre-existing network who sort of trained that kind of promo-creating set of behaviors that some people are quite good at raising money sort of thing… It was potentially an opportunity for LPs and people who invest in me to put their money to work to, frankly, find the undiscovered gems,” Ali explained.

Ali continued with providing the zoom attendees with valuable information for starting out at that beginning stage of fundraising and how to move forward building your company from there. She broke it down in a few different ways:

  • Maintain confidence in your vision and what it is you want to do with your product and with your company
  • Bury the ego a little bit and be open to feedback. Evaluate and analyze whether or not actually pursuing that feedback makes sense for you and is congruent with what you want to build
  • Be purposeful about picking the people you’re going to add to your team, especially your early on
  • Try not to take it personally. Take the feedback and you’ll find the right investor for you

When asked what the most important piece of the story for founders to bring into initial meetings with investors, Ali said “The ability for a founder at the pre-seed stage, to communicate the compelling need or problem or shared pain point in a community or in a customer segment and the broader market, is some of the more interesting information you can provide. How you provide will be pretty unique to you. The more unique and the more insightful backed up by your observations and your understanding of a customer segment and a market they exist in and a market you want to tackle, the better.”

Specifically, at Leadout Capital, they look for someone who knows how to write code and can ship a fast version of a product. From there, they want to see specific user adoption and retention.

A lesser-talked-about aspect of building these businesses at the pre-seed level is the need for marketing. Is it necessary? What type of proof in marketing is needed?

Ali answered, “If they’re able to generate revenue from the sale of the product, then you can start to apply a marketing cost and start to look at customer acquisition costs and payback… if you’re selling something physical or something that people show a willingness to pay for, then you can start to do the customer acquisition costs, some marketing stuff.”

The conversation continued with Ali explaining more about what Leadout Capital looks for in founders and what their mission is with investing. They look for alignment in values, companies that put an effort into diversity and inclusion, and supporting women in entrepreneurship.

On the other hand, Ali encouraged founders to ask themselves the following questions when they are looking for the right investors:

  • Do they understand your business?
  • Do they understand you?
  • Do they understand your vision?
  • Do you trust them to articulate that when they make a call for you?

“I think it’s really building trust and respect with someone… In many ways, it is an investor’s privilege to get to partner with you. We create the most value for our LPs when we pick right, and hopefully, you’re creating the most value when you hire the right people and you build the right product and you solve the customer pain point that you’ve identified,” she said.

Overall, Ali’s background provides her with an interesting take and nontraditional mindset on all different aspects of the business. She was an amazing guest to have on our virtual AMA to discuss how founders should be approaching investors, what investors look for in the pre-seed, and advice on how both parties can proceed from the initial stages of contact.

Read the transcription below for a full recap of the conversation:

Rohini Pandhi:

All right, awesome. Well, welcome, everybody. This is a good group of folks. I see some familiar faces. Hey. All right. Well, let’s kick things off since we’re already a few minutes into it, and I’ll make sure that we have hopefully a very interactive session and you all can start asking questions directly, but let me give everybody a bit of background. We’re in a very candid Ask Me Anything, an AMA. We’re brought to you by Transparent Collective, and with one of our favorite early-stage investors, Ali Rosenthal from Leadout Capital. Thank you for being here. Welcome, Ali.

Ali Rosenthal:

Thank you for having me.

Rohini Pandhi:

Quick bio. We’re very excited. I think this will be a great conversation, so quick bio. Ali founded Leadout in 2018 as an early-stage venture capital fund that invests in non-traditional teams in high-potential markets. Her career includes operating roles in technology, finance, investing, and professional sports. She was one of Facebook’s earliest business hires in driving growth and adoption for Facebook Mobile. I think the number was like 350 million people on Facebook Mobile, huge. Most recently, she was a VP of Partnerships at Wealthfront, and also a member of the investment teams at Greylock and General Atlantic, and started her career in finance at Goldman Sachs.

Rohini Pandhi:

Lots of interesting areas to dig into, but I’ll get the AMA started with a general question or two. I just want to make sure this is super interactive since we have a very closed group of people here. Just send in your questions on a Zoom chat and I’ll just call on folks to unmute yourself to speak directly to Ali throughout the event.

Rohini Pandhi:

Anyways, to get things started, Ali, what I think is really incredible and interesting about you is your background is very nontraditional, kind of similar to your investing strategy. You were a PAGE Fellow in President Obama’s Administration. You were a pro cyclist, and then you moved into kind of like “tech scene.” What do you think having that unique background and perspectives means to your investment style and the type of founders you generally gravitate towards?

Ali Rosenthal:

It’s a great question. Thank you, and thank you for the wonderful introduction. At Leadout, we’re early-stage investors and we consider ourselves generalists. I like that probably because of the non-obvious or the attributes of the non-obvious background you just described, but for me, I’m a learner. I’m a curious person. I love learning new things, learning about new technologies, for example, new cultures, different people, and I love to learn through people. I feel very privileged and lucky to be able to invest in innovation and in founders who are proven experts in an area of truly customer segment experts.

Ali Rosenthal:

For me, as I built my career, I wanted to go around and learn. Coming out of undergrad, I’d been a history major, but I pursued a career in banking because I perceived it to be a really good training ground for learning business and industries and how businesses kind of grow and measure their success or performance. To me, I grew up in the Northeast in Connecticut and I thought, “Oh, I’ll go to the big city. I’ll go to New York City, and just being in New York I’ll meet people and see different ways of life and experience different sectors of life.” That’s kind of how I broke through my career.

Ali Rosenthal:

I wrote a blog post when I joined Wellfront, which is my last full-time operating role, where I compared… I’m a pretty bad surfer, but I sort of compared figuring out next career steps to surfing and figuring out as a surfer how you find best waves so as to improve. For me, it always starts with people because the best surfers know the best locations, know the best waves. You’ll get the best sets if you kind of look to where the best surfers are.

Ali Rosenthal:

For me, I’ve always followed people throughout my career. People brought me to banking. People brought me to technology and technology investing. People brought me to Facebook. People whose minds and whose interests I felt like I learned the most from and I often gravitated to the markets, the sectors of industry, the skills, the innovation that was most compelling in the world, frankly, at the time I was able to top into it, the second thesis markets.

Ali Rosenthal:

Then, the third piece, of course, is when you bring your surf board to the beach and you look for the best surfers who are on the best waves in the best markets, what tool are you bring to surf the wave? For me, that’s been picking companies, either as an investor or as an operator as well. That’s kind of how I think about learning and trying to participate in success, which I’ve always perceived to be a group thing.

Rohini Pandhi:

Love that. A couple of questions on like those early days of Leadout, and maybe I’ll start with before you then became a VC, you were an incredibly active angel investor. I think over 30 investments in like consumer, mobile, SaaS businesses. When did you know VC was kind of the right route for you and that was the industry you wanted to be in? Who are the people that you learned from? Or why was this surfing area the most interesting for you?

Ali Rosenthal:

Yeah. I got my training as a principal investor at a firm called General Atlantic Partners, which is headquartered on the East Coast but is a global later stage investment firm that focuses on information technology investing. I think that’s where I kind of got bit by the love-to-learn bug, love to kind of go deep into business models, business analysis, market analysis, working routines, understanding innovation, shipping product, that sort of thing.

Ali Rosenthal:

I did really like that and what I discovered, though, having worked in the operating roles at Facebook and Wellfront and a couple of other startups is that I actually really liked the earlier stages of company formation and kind of the pace and the creativity and, frankly, the stress at times that you’re under to kind of take something from nothing and kind of move the ball forward. I think the combination of working in that environment as an operator after business school, where I was at Facebook and several other companies, honed by view that early stage is where I like to spend time, but I sort of always knew I wanted to come back to investing.

Ali Rosenthal:

I started just to practice. I had the good fortune to have a little liquidity in 2010 when angel investing was kind of still nascent. A lot of people are angel investing now, but this was kind of pre even super angels. It was very much a cottage industry at an earlier stage to the cottage industry that is or was traditional venture capital, Sand Hill Road, et cetera, and that I’m actually seeking to disrupt a little bit with Leadout.

Ali Rosenthal:

That’s kind of how I got my exposure to angel investing. I liked that and I think where I got frustrated when I ultimately decided and I… I think you asked me this question later on in our prep, Rohini, but where I decided to launch the fund was because I saw this gap in the folks, the founders who actually have access to early-stage capital, including from angels, to really set up their companies or set up themselves to really execute.

Ali Rosenthal:

One thing you learn as an operator, I’m sure many people on this call can relate to this and I know you can, Rohini, is there’s no such thing as a new idea. It’s all about execution and some luck. If you can’t execute when you’re starting a company, if you can’t be focused on how you launch your product, how you measure your product, how you get that next customer because you’re out fundraising, you can go out of business. One of the things that I was finding as an angel investor is that some great founders were coming to me.

Ali Rosenthal:

Many of them were women or persons of color, underrepresented and early-stage entrepreneurs who were struggling to bolt together around, perhaps because they didn’t fit pattern recognition, perhaps because they didn’t have a pre-existing network who sort of trained that kind of promo-creating set of behaviors that some people are quite good at raising money sort of thing. They have great ideas and they have interesting traction in their business, but people would come to me and say, “Well, I’ve soft circled this amount of money, but I don’t have a lead. Everyone told me to go find a lead and when I got a lead, then we would finish my financing.”

Ali Rosenthal:

I thought, “Well, I should probably be the lead if I can.” There’s some amazing founders here who have great ideas and I don’t understand why they’re not getting a lead. Perhaps it’s bias, perhaps it’s unconscious bias, but that seems like an opportunity, and so I combined that sort of understanding of-

Rohini Pandhi:

Love it.

Ali Rosenthal:

… myself that I really like the early stage, that I really like the investing, and that there was this gap and this opportunity to put people in business who absolutely deserve to be put in business. It was potentially an opportunity for LPs and people who invest in me to put their money to work to, frankly, find the undiscovered gems.

Rohini Pandhi:

Right. That’s great, and fits the Transparent Collective thesis very well, too.

Ali Rosenthal:

That’s why I sought you out . That’s why I funded some of your companies.

Rohini Pandhi:

That’s right, that’s right, and now, we actually have one of our founders who was in our last batch who just sent in a question, so Elkanah, I don’t know if you can… can you unmute? Do you want to ask a question directly>

Elkanah Carnell Reed:

Of course, I would love to. Hey, Ali, when I saw Vern speak at you, I was like, “Yo, I got to be here.”

Ali Rosenthal:

I love Vern. Oh, Vern.

Elkanah Carnell Reed:

Yeah, so what I built was Workopti. Workopti drives the interoperability of workflows across marketing operations. When you were talking about the relationship aspect of how you developed as an investor really resonated with me as an entrepreneur. When you talked about like the mediums through which we ride the wave for entrepreneurs, it’s the platforms that we build. My question to you is that, how… I’m fundraising right now.

Elkanah Carnell Reed:

I’ve got a pre-seed round going, 21% reserved, and I find myself because I did not have a mentor network, I did an investor walkabout because I found myself in a position where a lot of investors wanted to meet me and I wanted to build a relationship with them. How do you start to discern who is going to get high conviction as they start adding you to like their private newsletters and all of these things that I’m getting exposed to now? I don’t just waste my time because I don’t want to just become a professional fundraiser.

Ali Rosenthal:

Yeah, so you’re in that fun… Well, I like to joke that there is no fun in fundraising, but that’s not true. You kind of have to just work your own mindset around it. It’s an opportunity to meet people and it’s an opportunity to test your negotiation skills where you’re raising money because I have a ton of empathy for founders of product companies and corporations. You guys are being formed as corporations and then go, because I founded a company, it’s just mine’s a management company, it’s a fund instead of a product company, and I’m raising money actually now. I’m raising my second vehicle.

Ali Rosenthal:

There is advantage and privilege, I think if you see it that way, in having the market sort of share your story a little bit, but not kind of take you off-course too much. It’s knowing yourself, knowing what you want to do and staying convicted in your own vision. If people are sort of pushing back and saying, “Well, we need to see this,” it’s listening to that and sort of understanding whether or not that makes sense for how you allocate your time so as to come back with whatever they said they needed to see assuming that they would say, “Great, you did that, let’s continue the conversation or let’s partner.”

Ali Rosenthal:

I think you have to maintain a confidence in your own vision and what it is you want to do with your product and with your company, but also kind of bury the ego a little bit and be open to feedback. You can listen, you can take it in, and you can evaluate and analyze it later as to whether or not actually pursuing that feedback makes sense for you and is congruent with what you want to build and how you want to go about it. You may have to kiss a lot of frogs, but I think if you continue to kind of reflect on what it is you’re trying to do and you are clear to communication with yourself and then with the people you want to work with about that, you’ll find the right investors.

Ali Rosenthal:

There’s a lot of money out there. I think there’s a lot of unlock happening right now. It feels frothy, but it also feels like one of these secular shifts is happening. Maybe COVID ushered this in, but new businesses are being formed, new products are being built. You have a whole new set of buyers, a whole new set of budgets, and so being, I think, purposeful about picking the people you’re going to add to your team, especially your early on because it’s a really important relationship with an investor and a founder, is probably the thing to stay laser-focused on. Know that if you do that, you’ll find the right investors.

Elkanah Carnell Reed:

That really answered my question. I was just like taking little notes because I’m going to like tweet it.

Ali Rosenthal:

Oh yeah

Elkanah Carnell Reed:

That’s good.

Ali Rosenthal:

… oh no. Thank you for the question. It was a great one. It’s like you start something, you put yourself out there and it’s an extension of you, and when people ghost you or they pass or they tell you what’s wrong, it’s like someone told you your kid was ugly. It’s hard not to be like, “What?” Try not to take it personally. Take the feedback and you’ll find the right investor for you. It happens to all of us.

Elkanah Carnell Reed:

No, thank you.

Ali Rosenthal:

Good.

Rohini Pandhi:

I think that was a great question. I’d love to extend it a little bit. A lot of times founders almost want to know, “What shouldn’t I put in the deck? What should I put?”, because they think if there’s a bit more concrete… I do think that there is some input there of like the right narrative, the right story that you want to tell before a meeting or even during a conversation with an investor.

Rohini Pandhi:

I’m curious if there’s any recommendations on dos and don’ts, how important our financial projections in pre-seed companies where most of that is probably made up anyway, or, how important are product demos? Things like that. Can you give me some general advice on what to include as part of their story?

Ali Rosenthal:

Yeah. I think if we sort of speak to what we look for and then-

Rohini Pandhi:

Perfect

Ali Rosenthal:

… like what I see in a market as well because just because that’s what I look for doesn’t mean that someone else wouldn’t love to see that or wouldn’t say to you, “Well, why didn’t you put in a five-year model projecting how you’re going to get to $50 million in revenue?” I think if the pre-seed… I’ll speak to pre-seed and then I’ll speak to seed form our perspective, and then I’ll talk to you about kind of what I think the market to make sure it’s different from what I look for or what Leadout looks for.

Ali Rosenthal:

For us at the pre-seed stage, we understand that you don’t have a lot of traction. The great series A funds who get all of the best deal flow can sit back if you’re Benchmark or Sequoia or whoever and wait to get the introduction into the company that is clearly starting to hit product-market fit. Then, it’s a battle on price or who from the fancy list of names at these firms are going to join your board. That’s awesome and you leave it.

Ali Rosenthal:

Pre-seed and seed, we at least at Leadout expect that you will have not hit product-market fit, but we kind of want you to tell us what you are seeing that is the most interesting to you about feedback on your product. The ability for a founder at the pre-seed stage, I think, to communicate the compelling need or problem or shared pain point in a community or in a customer segment and the broader market is some of the more interesting information, I think, you can provide. How you provide, I think, will be pretty unique to you, and the more unique and the more insightful backed up by your observations and your understanding of a customer segment and a market they exist in and a market you want to tackle, the better.

Ali Rosenthal:

At the pre-seed stage, if it’s a bunch of like, “Hey, this market is massive and if we just get to 2%, we’re going to be worth this.” I will go do that research anyway. It’s good for you to have it in there, but I’m much more interested in like, “What about this customer need?” Either as an end consumer or a business or an organization within a business organization that you want to provide a solution for with… In our case, we look for software and new solutions, but there are more straight down the middle consumer investors, hardware investors, et cetera, pharma investors.

Ali Rosenthal:

I think the ability to communicate a compelling need is really important and that kind of be the hook. Then, it’s like, “Let me tell you why you should be paying attention to this evidence,” whether it’s like, “This indicates a fix or a delightful moment,” or, “This conversion rate is higher because no one else does this.” There’s aspects to, “Okay, who else is in the market that you’re competing for share in?” Et cetera, et cetera, but I really think at the pre-seed level, how do you communicate that you have an insightful or unique insight about a problem that exists and how you go about solving it?

Ali Rosenthal:

For our structure virtually, that specifically, because we’re self-driven investors, we also like to see like a built MVP. It can be pretty rickety, but for us, we tend not to fund a business plan and a suggestion end-year model that, “Hey, we’re raising money to go find a CTO or a VP of engineering.” There are plenty of pre-seed funds that do that. Leadout specifically just wants to see because I come from software, my business partner’s an electrical engineer, we look for someone who knows how to write code and can ship a first version of a product. I think that helps you tell your story, too, in terms of evidence in the pre-seed space.

Ali Rosenthal:

Seed, we want to see an operating data. You want to see enthusiastic user adoption and retention. That can be reflected if you’re a B2B company on a willingness to pay or even a willingness to give you the logo and tests, but some evidence that the product is being used or paid for, and then same on the consumer side, cohort analysis, everything from your funnel to how you’re actually attracting users. Then, the consumer side especially, how much organic growth are you getting? A lot of investors kind of cringe at the notion that a bunch of the round will go to Facebook’s bottom line or Twitter’s bottom line because you’re paying to acquire this segment that say is your perfect segment, but that ends up churning quite a bit.

Ali Rosenthal:

If you’re in the seed stage and you’re raising like in your consumer company, I’m definitely prepared to go through cohort analysis and churn and organic growth and kind of how you’re finding the channels to, virally or otherwise, get people to adopt your product. Well, and I think that is true-

Rohini Pandhi:

That is super helpful

Ali Rosenthal:

… across the board in the space. True for us if you’re in the market.

Rohini Pandhi:

Yeah, perfect. Actually, I think, Cali, you had a question that might be double-clicking on this. I don’t what Ali just walked through answered it, but do you want to introduce yourself and… Oh, it looks like you’re waving, but… It was answered?

Cali Carlin Sorenson:

Yeah. Honestly, yeah, you just actually answered my question perfectly. I was asking about timing of action revenue, so that was perfect. I do have a question more about what has to be proven in marketing because, obviously, I’m the co-founder of a company called Commemo which uses software to make group tribute books. It kind of takes the pain point of having to collect and gather those comments. We collect them. You share the link and then we collect them and we autoformat them into the book because we found if you try and make a 60th birthday for your mom, it can take 40, 50 hours. We take that down to like two hours.

Cali Carlin Sorenson:

Anyway, but we are finding some great traction virality, but obviously our next phase we would need marketing. What type of proof do you need in marketing to be able to raise some seed money for marketing? Or is that always a no-no to need money for marketing?

Ali Rosenthal:

Oh, I think there are certainly business models that lend themselves to marketing and they tend to be business models… They tend to be… If they’re able to generate revenue of the sale of the product, then you can start to apply a marketing cost and start to look at customer acquisition costs and payback. One thing I hesitate to encourage founders at the very early stage to include in their debts is like a guess at like lifetime value. I think it’s fair for an investor to understand for you to show that you understand how much it costs each to acquire a user, but if you’re able to pay that back because your margin in your first margin kind of beats the cost of acquisition, you’re in a good spot. Then, there are different kinds of businesses.

Ali Rosenthal:

It’s hard for me to say, “I’m like a physical product business,” or even kind of like a link to a virtual product, but if people are paying and you have margin, you can start to play with, what’s the best channel to go acquire more customers? If your product is free but you have to pay to acquire for usage, that can feel a little nerve-racking. We’ve famously sort of… well, famous in my mind. I don’t know if this is kind of more about Facebook, but for a long time Facebook was known as to say that we never spent more than $150 on marketing for the first four years of the company. Even then, there was resistance to building marketing in because the network effects and the virality of the product just… we didn’t need to spend on growth.

Ali Rosenthal:

That’s changed at Facebook now. I’m sure if you opened up their public financial review, you would see marketing spend up the wazoo, but at the early stage, the point was, “This is so viral, this is so sticky, this is so engaging, we don’t need to pay for it.” If you’re asking a customer to pay and they are paying, then you can go find more customers who look like your payers who are willing to pay, so I think that’s totally appropriate if you’re selling a product, if you’re selling something physical or something that people show a willingness to pay for, then you can start to do the customer acquisition costs, some marketing stuff.

Ali Rosenthal:

Then, I think if you’re already stage two, if you’re a founder who’s not necessarily eyeball-deep in marketing experience from prior jobs or education or whatever, it’s okay to do founder-led marketing. Founder-led sales is a thing, too, where you’re the person articulating vision. You’re the person recruiting talent. You’re the person trying to build your customer base. You don’t have to hire for that yet, further on the budget for it, and frankly, it should be done by you, but if there starts to be an equation or a machine where you know there’s a segment of people who want that product and they are willing to pay, then as long as it doesn’t cost you more to get them, hey, that’s something that you should be playing with, for sure.

Cali Carlin Sorenson:

Thank you.

Rohini Pandhi:

Great. Great question, and one thing we actually skipped over was kind of before you even get to that pitch or the story or what the funds are going to be used for is introductions. Carrie actually asked a question specifically on the first part of the process, so Carrie, would you like to ask your question?

Carrie Love:

Yeah, thank you so much. Carrie Love, I’m the CEO/co-founder of Must Deliver. We intelligently match owner-operators to shipping clients and we’re really focused on small-to-medium-sized manufacturers and owner-operators and small carriers. We’re already operating. We’re post-revenue. We’re in the Midwest. We’re launching the West Coast. I’m closing an angel round, which I’m so excited about. It’s insane. It’s so much work when you’re trying to also operate your business, but it is that you’re doing… Your founder that’s leading the marketing, which is my background, leading the sales, which is my background, operational.

Carrie Love:

I now have to close, pivot, and focus on opening our first price round, which is a seed round. I’m in Portland, Oregon, and it’s COVID. How do you network? I have to say thank you for doing this because it’s a great opportunity. My COO, John Mecklenburg saw it and was like, “Sign up for this. You have to do it.” Thank you for doing this event-

Ali Rosenthal:

Sure, you’re welcome.

Carrie Love:

… because it gave me an opportunity to talk with people. Our real core value is we’re a hundred percent transparent, so everybody sees a transaction, everybody sees the same paperwork. We may be a little in front of the industry on that in trucking for the U.S., but we won’t compromise, so it’s like, “How do I do it? Where do we go?”

Ali Rosenthal:

Yeah. Well, I mean, you’re right. Events like this, thank you to Rohini, and the Transparent Collective team are so important, especially when we’ve all been sheltering in place. I was actually talking to a founder of a later stage business that it’s kind of been energy storage before this. We were just… I think it’s really important to build relationships and affinity and networks despite kind of the physical forced separation that we’re all in right now. There are a bunch of tools that, this being one of them, Zoom being one of them, but you might have to make a little bit of an extra effort because information flows differently and not as maybe organically as when you’re… You do whatever you do to bond with people, whether it’s a cocktail party or a event or a music concert or a round of golf or something.

Ali Rosenthal:

Reaching out to one another and networking and especially peers, peer networks are really, really important. You’ll have your relationship with your investors and your advisors, the people you don’t want to disappoint, the people you want to show up to the meeting and make sure you’re telling your story and you’re showing up. It can be harder and it can be very lonely to kind of deal with a bunch of, “Oh my gosh, what do I do given that this happened?” Being able to turn to other founders who have experienced or are currently experiencing the ups and downs of founding something is crucially important.

Ali Rosenthal:

We’ve had to sort of adjust in the sort of post-COVID environment to how we do that, but building community, being able to ask for help, being helpful when asked can really sustain you in these arguably pretty dark days at times. You have opportunity costs. All of you guys are super talented and you can get paid a bunch by bigger established companies and apply your skills and your energy to their vision, and you’re all taking a huge risk. I would say figuring out who your network is in terms of peers is really, really important and that can lead to introductions. “Hey, I just closed my round, but this fund was really interested in what I’m doing and there’s an aspect of what you’re doing that is interesting. Should I kind of make an introduction?”

Ali Rosenthal:

That feels good and it’s… I don’t know, it’s just the way of building, I think, the type of connective tissue between people who have experienced like similar sort of challenges that I think will just be so good for your mental health and your fundraisers and for each other. I really, really encourage that.

Carrie Love:

Thank you.

Rohini Pandhi:

Awesome, and I think just to add onto that, too, Carrie, you can also you your angel investors since you have all of them kind of helping out. Use them to try to network as well because I will say the angels usually know who the investors are to go to and who they kind of keep up with and have relationships with. I usually always say that a founder should talk to Lido. That’s like the first person that I always try to move people towards

Rohini Pandhi:

… and so if you use the angel investors to get the real deets.

Ali Rosenthal:

No, that’s great-Your success is their success, right? They took a bet on you.

Carrie Love:

Yeah.

Ali Rosenthal:

They want to help and presumably you’re an angel because you want to help. You expect that you do a bunch of work in the beginning, and if it works, then 10 years from now it’s like, “Oh my gosh, I was an investor in this,” but that’s kind of the social contract that most angels go into investing with eyes wide open, so…

Rohini Pandhi:

Yeah, exactly, exactly. Oh, okay. Elkanah, do you have another question? I haven’t even read it yet, so I’m just going to let you run with this.

Elkanah Carnell Reed:

Oh, and that was really kind. I have two kids under the age of three, and they are coming in, but my question is so I have a strong team as an enterprise success startup pre-seed. Pre-seed on the institutional level is a rather new entity, and so I got a chance to spend time with like series A investors. Series A investors are telling me like, “Elkanah, as you go through this process, this has already venture scale.” People tell me that, but they also say, “If you get to meet… My job, personally,” and this how you determine a good investor, “Is to go get you to like Iconix or Andresen because we have X-billion-dollar AUM and they can take you all of the way through to fulfill the full product vision.”

Elkanah Carnell Reed:

With the lack of data, sometimes to attack this analytically just the way people look at underrepresented founders. With the lack of data in pre-seed, how do you know when someone actually has the relationships to do the things like to build a very large company when there’s not really a lot of data that shows that that’s even possible, right? Seed, yes, series A, but not so much of a pre-seed. Just looking at it critically.

Ali Rosenthal:

Just running through your question, are you saying how do you as a founder that you’re-

Elkanah Carnell Reed:

Yeah. How do I as a founder start to understand that? Just because I have been told two schools of thought. I have people who have told me who have raised institutional pre-seed rounds saying, “Don’t raise pre-seed from institutions. Go raise from angels-

Ali Rosenthal:

Oh.

Elkanah Carnell Reed:

… “because it’s a better use of time than capital-

Ali Rosenthal:

Oh.

Elkanah Carnell Reed:

… “versus like actually going down the institution around four pre-seed.” That’s why and I think some of that is because typically like the high-signal investors are really at seed. Pre-seed is that emerging class in terms of institution. THat’s what I’m trying to say. I’m just trying to understand so I don’t spend all of my time fundraising. How do you start to discern all of this so that you can get the right partners at the right stage and move forward?

Ali Rosenthal:

Yeah. Well, I mean, pre-seed as a category, kind of getting back to what I said I look for, it sort of depends on where you are in your key development and your product development and sort of your push into the market that ultimately kind of… There are two ways to look at it. One is, “This is my first institutional raise. I haven’t had to take money before, but I’m already doing a million dollars in revenue run right. You’re probably not a pre-seed company. Maybe you are, but maybe it’s a seed and my guess is you’re doing that because you have more than just one person working on things, so you’ve actually hired people.

Ali Rosenthal:

If you’ve been able to bootstrap, if you’ve been able to raise a round of like friends and family so as to get yourself there, kudos. If you don’t have those resources but you’ve started to build something that clearly the market wants and you need to you pay people, you need to pay yourself, you need to pay to post stuff on AWS or whatever, then go find the investors appropriate for the size around you are and tell them why you’re raising as much as you are.

Ali Rosenthal:

The category pre-seed these days tends to be anywhere from on the low end $250,000 up to a million and a half is probably still considered a pre-seed, and there are investors who focus on pre-seed only or mostly and will write checks that are between 100K up to sometimes 500K and help. They are institutional investors. They have limited partners themselves and they’ve thought about the strategy of spending time in the space to meet founders when they’re raising their first institutional round. They might be willing to move with you a little faster because they have already thought about the risk of the stage and the size of the company and the traction, but they want to get in early and want to get in first and they’re willing to take that risk. They write slightly less large checks.

Ali Rosenthal:

When you have big like… You mentioned Iconix or Andresen, these guys have massive amounts of funds that they have to put to work, and when you think about what motivates them so that they can keep paying their salaries and keep making their carry, they got to return tremendous value on billion-dollar funds. Their time best spent is probably on companies that are larger that can take more money, that can take that $200 million check that can turn into 20 or $2 billion of value. You don’t want $20 million right now. You wouldn’t know what to do with it. You’d be basically handing over your company, so they’re the wrong ones for you.

Ali Rosenthal:

I think some firms that do sort of multi-stage investing and say that they come down the stack, if you will, they’re doing it earlier and earlier, it’s going to be careful with those guys, too, because, yeah, they might write a check, but are they really going to help? It may just be like a bet on red. It’s like, “Oh, this guy’s interesting and sure, that’s interesting. We’ll just keep track of it.” Then, when you call and you say, “Hey, I need those customer introductions,” they’re going to be like, “Yeah, yeah, yeah, yeah, yeah, we’ll get back to you. We’ll get back to you.”

Ali Rosenthal:

Be wary of the funds that have decided, and then know they’re smart, smart people that run these things that know that the early stage is probably the best kind of stage to get in, especially if you’re right, who have funds to kind of throw around but who don’t have the time. That’s the one thing that is not fungible for all of us. We cannot clone ourselves and make another hour in the day, so be wary of the funds that say, “Oh, yeah, yeah, yeah, well, here’s our big name.” Easy for us to kind of check and actually don’t help. Take their money if you’ve got other people around the table who will help you, but I do see a part of… Leadout’s thesis is direct, guys.

Ali Rosenthal:

This is a very, very, important time in your journey as an entrepreneur and in building your company, and you do want, I think, investors who sit around the table and who have an understanding and empathy, who have large operator networks, who are willing to roll up their sleeves and be an accountability partner with you as opposed to like bigger funds that just are trying to build an index and may not help you.

Ali Rosenthal:

If you can build a syndicate where you have someone who’s really going to help like Rohini, and then you have like an Andresen, sure. If Rohini and them end up doing a lot of the work, but you can also be thoughtful about how you build your syndicate and who you want to be helping every day is. Yeah, sure, big AUM businesses, they might have the cash, but they may not be that helpful to you.

Elkanah Carnell Reed:

That was so good. That was the truth and thank you. You spoke the truth.

Ali Rosenthal:

I’ll just say

Elkanah Carnell Reed:

The truth.

Ali Rosenthal:

Now, I have to remember what I said

Elkanah Carnell Reed:

The truth. I’m tweeting it.

Rohini Pandhi:

Sure, all done, we’ll tweet about it later. Perfect perfect. We have about 15 minutes left, and now the questions are really starting to come in, so I’m going to go from the first folks that started asking and we have another TC alum are you on? Can you unmute yourself and ask your question?

Speaker 6:

Yes. Hello. Thank you again for doing this. I had a question just because I think… I started the company… I started the GetLabs back in 2014, and then I ended up taking a break and now I’m kind of coming back and relaunching it with some of the same people and some new people. With everything that’s happened this year and kind of seeing on like a sociopolitical/economic level, everything is dramatically different and I’m just wondering how, one, if it’s personally affected your kind of thesis around investment. Then, two, if you’re seeing any kind of influence on the field as a whole, the sector as a whole, yeah .

Ali Rosenthal:

The sector meaning like venture? Or technology?

Speaker 6:

Venture.

Ali Rosenthal:

Or… Okay.

Speaker 6:

Yeah.

Ali Rosenthal:

I’ll answer the first question first, which is, has it affected our thesis at all? No. When I started the fund in 2018, and there are a lot of funds that kind of share my thesis now and that at times has been a little frustrating, but also like very gratifying for the most part. I always said that if I put myself out of a job with this thesis because everyone thought this was like that we’re right, that like… It’s not enough to be right in investing.

Ali Rosenthal:

In order to create alpha, which is what we’re supposed to do as early-stage alternative investors, you need to be non-consensus and right, and so if it’s not a consensus to bet on the fact that talent is evenly distributed in this world but that opportunity has been constrained to different types of people, let’s be honest, to different sectors of the world to different degrees, academic degrees. That was a bet I was willing to take all day, especially having been at Facebook from early on and just seeing the secular shift, the sort of transformation that happened with mobile and mobile computing. Now, we have low-code and no-code and there are just more and more tools that are less expensive that next generations of humans are more versant in.

Ali Rosenthal:

Why wouldn’t you believe that people who come from a community, come from a lived experience, come from a different training would have the kind of core insights around a problem that exists that they wish to solve and then have the tools and the skills and the capital to pursue solutions to that problem? I’m even more convinced, given everything that has happened and the evidence of how business are being set up partly as a result of this black swan event that we’ve all have been living through for the past over a year, that my thesis is correct. It seems like a lot of other managers seem to think that that is true, too, which is great, and if I put myself out of a job with this thesis, that would be a good thing.

Ali Rosenthal:

Unfortunately, we have a lot of work to do. I have a $27.5 million fund. Andresen is, what, however many billions of dollars? Most venture capital and private equity is directed by white men still and it gets directed to white men. I will say something about my thesis that is I like to think as very inclusive of white men, and one of the first companies that I invested in was a group of men, two men who are white and one guy, his family was originally from India, South Asia. They were kind of inherently not diverse when I first invested in them, but I talked about what I care about as an investor and in what Leadout stands for, which is grounded in diversity, equity, and inclusion.

Ali Rosenthal:

Then, I didn’t want to be the arbiter of what constitutes diversity because there’s a cognitive diversity, there’s intellectual diversity, and diversity is a function of numbers and that we all do better by like embracing diversity, even though it can seem a lot more friction, it can feel harder at the beginning. There are reams of data that show that diversity outperforms but that your opportunity to build a diverse organization on every level happens at the beginning of a company’s limitation.

Ali Rosenthal:

You can be a not inherently diverse team and still get money from Leadout Capital so long as you are committed to building diversity into your organization, and this company that I would say we were early investors in has done that. Their team today is roughly 50–50 minimum across organizations. We already had a question about how we think about diversity, sort of explaining to you. Could be doing better on ethnic diversity, but they are being purposeful about who they source from. There are a lot of emerging groups and sectors of software-driven talent that are popping up and they are holding themselves to hire from those areas and I love that. We need allies.

Ali Rosenthal:

The point is not to flip the world on its head where everyone who was in charge now feels oppressed out of some sort of like vengeful… I mean, that’s not going to be good for everyone, so the idea is to, at least for us, really vet for alignment values-wise when we build relationships with founders and tell them what we care about and tell them that they should hold us to account to help them with what we care about. That’s kind of our approach to things, so I haven’t changed at all on that. In fact, I’m doing my best to enhance the resources that I provide to the portfolio to kind of put my money where my mouth is and really help all of my teams with that.

Ali Rosenthal:

Unfortunately, to answer your second question, is driven a little bit by some rough data, especially around women in the workforce, women starting businesses, women receiving venture capital. These numbers are all down over the past couple of quarters. I think at a broader sort of national economic level, almost a million women dropped out of the workforce in the third quarter of 2020. Many of them… I think the majority of them were persons of color, and so there’s a lot that needs to be addressed, I think, hopefully by between the group of you here and how you’re going about thinking about not only hiring people into your businesses, but building businesses that hopefully empower people to work differently.

Ali Rosenthal:

Unfortunately, a lot of caregiving falls to women and we’re seeing that in the numbers. It’s very hard to start a business when you also have to get your kid to school or get your kid masked to school or do virtual learning with your kid. That falls on men, too, but the numbers evidence that it falls more on women if you look at the number of women in entrepreneurship. That has changed. That is a concern and that’s why I’m raising another fund to do my part.

Speaker 6:

Thank you so much.

Rohini Pandhi:

Love it. That’s great. Thanks for the question.

Ali Rosenthal:

Yeah-

Rohini Pandhi:

All right. I’m going to… You’re getting a lot of applause, by the way, on this on the chat, but-

Ali Rosenthal:

Thanks.

Rohini Pandhi:

… I’m going to keep going because I would love to hit the last three questions in-

Ali Rosenthal:

Sure.

Rohini Pandhi:

… maybe the 10 minutes we have. Diego, do you want to introduce yourself and ask a question?

Diego:

Sure, and thank you guys for doing this and thank you, Ali, for taking the time. I’m Diego. I’m originally from Venezuela. I’ve been in the States for the past 10 years. I’m a first-year MBA at Wharton now and working on a platform for influencers to sell food products. I’ve been following you guys since you started. I had kind of a high-level question on Leadout. Curious to see how your process of finding end supporters, what you call them non-obvious founders, has changed over evolved since you started. That’s on a high level.

Diego:

Then, the second question is, did I understand you correctly when you said that… This I say for myself. I don’t have a technical background and the platform I’m working on will require technical work. I’ve been getting support from people here at Penn and elsewhere, but basically I will seek out a CTO at some point. In your investment criteria, do you essentially pass on people who don’t have technical backgrounds? Or I didn’t understand that correctly.

Ali Rosenthal:

No, it’s a preference just to have someone on the team, and so that person could even be like… I would want to do a couple of vetted firms that you could outsource to, for example. There is sources of talent, in fact, many of which are coming from Latin America, Colombia in particular, Mexico, that if you need an iOS path developed. There’s a critical top tel that a lot of my companies use. It’s more that I want to see a working product. There’s a difference between, “Hey, I’m raising money to hire someone.”

Ali Rosenthal:

That’s a little more rickety on a number of levels, especially for you as the founder because one of the things that when you think about team building that’s so important is that you find being a solo founder is fine. It is particularly lonely. I can speak from experience. I did it for a while before bringing on my partner, Steve, at the top of the year. I have backed solo founders, but you want to know that a founder has got their support system and can do and not only like from emotional, but also can help you build.

Ali Rosenthal:

If you’re building like a product that is delivered with zeroes and ones with software, I like to see someone in place that can do that because as you ideate and as you kind of think about the product and sort of say, “This is my observation of the customer, this is how I’m going to implement it, I’ve chosen to implement the software,” that’s a core component of how you build the business, how you go to market, how you make decisions, how you hire. Having someone on your team when you’re pitching me that is doing that with you, they can be outsourced, or you developed it, you’d have hired that first person that is so core to delivering product. It’s something that I certainly look for.

Ali Rosenthal:

I have a solo founder who is a product person who doesn’t write code, but has worked with engineers, has a big network, and has known how to hire and work with engineers. When we factor, it’s more that when you see the deck that’s like, “We’re raising the $600,000 to hire someone to build the product,” that like I tend to shy away from as specific to Leadout. That’s been something I’ve learned is it can be tough for you as the founder, and certainly tough for me as the investor, so that’s kind of that criteria.

Ali Rosenthal:

Your other question, oh, was how I’m finding non-obvious founders. Well, Transparent Collective, that’s one way. That’s just something I constantly, constantly do is, where are… I love stories. We love stories. I mean, Steve Jobs was so clear about this when he was building Apple and building products for Apple. He was so clairvoyant about kind of how we as human beings identify ourselves to ourselves, to the world. It’s through stories, so I love to hear people’s stories. I’m like a sucker for that.

Ali Rosenthal:

I will go read an article. I will talk to Rohini about some company she saw. I’ll hear from one of my LPs. I’ve built a big base of limited partners who themselves are founders and executives and leaders and we really try to unlock that for you if you’re a founder in our portfolio. We’ve got some amazing people who really are philosophically aligned with the thesis. I just love to… We just wanted a company in Tampa, Florida, that’s doing Blockchain infrastructure and this woman told an amazing story. She sent me an email and great ad. You know, I thought she’d found some amazing founders who have read what I’ve written and resonate with what we stand for or want some access to some of my operating experience.

Ali Rosenthal:

Send me a great email and then we talk. That is my job is to find you guys as well, and I try to find you guys by doing things like this and by writing and by hearing your feedback. Tell me where I should be looking. Penn is amazing. The Latin founders, I have a number of LatinX founders in my portfolio, one came from Puerto Rico, a team from Mexico, and actually two Spaniards were co-located with their CEO who’s in New York and Texas. You know, it’s through founders, it’s through operators like Rohini, and frankly, you guys tell me that’s my job is to go find you guys, and any feedback for how I can do that, I’m all ears.

Diego:

Thank you.

Ali Rosenthal:

Yeah. Thanks for being here. Thanks for the question.

Rohini Pandhi:

Perfect. All right, maybe just to close out, I want to make sure that we respect everyone’s time, and I’m sure we can continue the conversation online or on Twitter or something like that if folks have more questions. Faith, do you want to ask your question to kind of close things out today?

Faith:

Yeah. I’ll keep it brief. Thanks for doing this-

Ali Rosenthal:

Hello.

Faith:

… Rohini and Ali. My name is safe in building the personalization layer of the E-commerce infrastructure, and one of the things that I’m curious about is I know you all are focused on leading. That was in the story that you were telling from the beginning. I think there’s a misconception about like what a lead actually is, whether or not a lead is writing the biggest check, whether or not a lead is the one leading due diligence. I wanted to know if you could just give us your perspective on that since that’s where you’ve chosen to focus, and hopefully we can wrap it up there.

Ali Rosenthal:

That’s awesome. I love that question. It’s super relevant because I was literally talking to a founder yesterday about this, like the semantics of what a lead is and, do you need to be writing the biggest check to be the lead? Et cetera, et cetera. I don’t know that I have the right answer, I can just reflect to you that there is some confusion about this and it exists amongst investors I would say as well. I think what I like to do as an investor and what I’ve heard my portfolio company founders say is it is hopeful to have some… I do think like if your round gets led, you can get done faster. If someone’s pricing your round, they’re setting price and there’s real discipline and experience and market analysis brought to bear there and there’s value in that.

Ali Rosenthal:

If it’s a safe round, biggest check might warrant that I say, “Hey, you know, I’m taking the biggest risk. This is early, this is risky. I’m taking the biggest risk with this check, and so as a result, I want these side letter terms.” Oftentimes with a lead, you’ll get side letter terms. Ours simply around if we’re taking the biggest risk, we want to be treated in a most-favored way, or we want the ability to follow on our pro rata. Really, I think your lead investor should be the person or the team that you want to pick up the phone and call with like, “Wow, this is a problem,” or, “I need help in this, or, “In your experience, what happened here?”

Ali Rosenthal:

Kind of the way that gets pulled together and to kind of do business is probably around round dynamics. Do they help you build your syndicate? Do they have the expertise and the network that can really unlock a lot of value for you? Have you set the expectation that that’s why you’re telling them that you can lead? I’ll take your money versus someone else’s and et cetera. It’s a little bit like a… There’s some semantics in there, some gamemanship, but I think if you think about who you want as a lead, it has more to do with who you want to be partnered with, who you want to be working with.

Ali Rosenthal:

When you’re going to raise your next round, do they understand your business? Do they understand you? Do they understand your vision? Do you trust them to articulate that when they kind of make a call and say, “Hey, you should look at this company so-and-so who does series A rounds, et cetera?” I think it’s really building trust and respect with someone and because you are giving them… In many ways, it is an investor’s privilege to get to partner with you. We create the most value for our LPs when we pick right, and hopefully you’re creating the most value when you hire the right people and you build the right product and you solve the customer pain point that you’ve identified.

Ali Rosenthal:

You want a group of people from early on who understand that and will do everything they can do to help you, but you’re the one creating value. When you think about the lead vetting investors for how they’re going to help, do you like them? Do you trust them? You’re taking a huge risk, so that’s how I think about lead is like, “Who do you want on your cap table?” There’s a lot of sausage making that we all do and it’s like, who are you willing to say, “Hey, if this is all to this sausage company, then like,” so…

Faith:

Awesome. Thank you.

Ali Rosenthal:

Yeah. You’re welcome.

Rohini Pandhi:

That was great. I love that, and I think just that relationship piece was reiterated a few times in a few different questions, soI love this. Thank you all for joining. This was so fantastic. Thank you, thank you, thank you, Ali, for helping us and talking to everybody in a very close-knit Transparent group where you can share information and just kind of give everyone the real real. I really appreciate… your time here and I think everyone came away with a… Thank you. I think folks that don’t know, you can find Leadout at leadoutcapital.com, and I think it’s @leadout on Twitter.

Ali Rosenthal:

Yeah.

Rohini Pandhi:

All right, perfect. Perfect, and for anyone that doesn’t know about Transparent Collective, we’re at transparentcollective.com and @TCfounders. Thank you again, Ali, for your time and your advice, and thank you all for joining us today.

Ali Rosenthal:

Thanks all of you. Rohini, thank you so much, Transparent Collective and thank you all for your entrepreneurship. Without you, we wouldn’t have a job, so thank you for my job!

Rohini Pandhi:

Thank you

Transparent Collective helps Black, Latinx, and women founders access the connections & resources needed to succeed.

Transparent Collective helps Black, Latinx, and women founders access the connections & resources needed to succeed.